The Large Company View Of Tax Reform: Taking A Hit To Get A Level Playing Field

U.S. tax reform talk is officially back on the table in Washington. In the days before the debate on healthcare reform became an all-consuming topic for U.S. lawmakers, there was quite a bit of sound and fury concerning a proposed overhaul to the corporate tax code. Though the topic had been cast into the shadows by a government shutdown and shaky launch of Healthcare.gov, it was resurrected recently when Senator Max Baucus (D-Mont.), chairman of the Senate Finance Committee, released a plan to overhaul the tax code for multinational corporations.

I touched on the topic a few weeks back when I asked the question: will the proposed corporate tax rate really be lower? My supposition was that a headline tax reduction from 35% to 25% could potentially leave corporations paying more in taxes once you account for the removal of several current deductions that are said to be going away under the new corporate tax proposal.

The article generated quite a bit of feedback and one of the people who reached out to me offered a valuable perspective on how U.S. multinational tax departments are thinking about this issue.

Mary P. Van-Veen is the vice president, tax, at DuPont, where she oversees the multinational chemical giant’s global tax function. DuPont is a member of an industry group called the Alliance for Competitive Taxation (ACT), which is made up of dozens of multinational corporations who support comprehensive tax reform that lowers the corporate tax rate to 25% and establishes a modern, globally competitive tax system that aligns the U.S. with the rest of the world.

She was able to put my hypothesis about the potential bottom-line impacts of corporate tax reform into no-nonsense terms:

“At DuPont, for example, we know that the proposed reforms to the U.S. corporate tax will result in an expensive up-front hit. It’s essentially a cash-flow issue. With the potential reforms under consideration, we will lose the ability to accelerate tax deductions, LIFO accounting and certain depreciation strategies. It would likely take at least six years to recover from that initial hit and I am aware that many ACT companies would take substantially longer. Longer term, U.S. companies would be more competitive, but giving up these deductions only makes sense if accompanied by a lower rate and a territorial tax system.”

Still, despite the initial impact, Van-Veen is a vocal supporter of reform because she says it will “level the field” with foreign competition and bring much-needed clarity to the country’s out-dated tax system.

“The transition would be challenging, but that’s really just a function of shifting the status quo. There is a light at the end of the tunnel when you take a longer term view. Right now, we have a situation where trillions of dollars are sitting offshore because it does not pay for U.S. companies to repatriate those profits at the current 35% corporate tax rate. It’s cheaper for them to acquire foreign firms or keep the money parked outside of the U.S. Long-term, the only sustainable solution to keep U.S.-based multinationals competitive with the rest of the world is to develop a tax code that encourages economic growth by U.S. multinationals, both domestically and globally.”

When asked about Senate Finance Committee Chairman Max Baucus’ discussion draft, Van-Veen pointed to a statement from ACT, which, supports the notion of tax reform, but ultimately criticizes the current proposal for falling short of creating a solution that levels the international playing field:

“While we are encouraged by Chairman Baucus’ continued commitment to pass comprehensive tax reform, we are concerned that the international reform ideas in the staff draft undermine the stated goals of creating jobs, generating growth, and making America more competitive around the world. The Chairman has recognized how today’s uncompetitive tax code is already leading to the loss of U.S. companies. Unfortunately, many of these proposals would put the U.S. tax system even more out of line with the rest of the world.”

It’s still early in the tax reform proposal process and no one expects any legislation to pass easily through the current Congress, but the lines are clearly being drawn for where the debate will focus. The key, according to Van-Veen, will be removing many of the unnecessary complexities in the current system, summing up: “simpler is better in the long run.”

Van-Veen’s point is a crucial one. It is exceedingly challenging for corporations to plan and make investments when the future of the tax code is in mired in complexity and uncertainty. As I’ve written before, any significant change to the corporate tax rate will have ripple effects that impact forecasting, planning and financial reporting and could even change the value of tax assets. In many ways, the current uncertainty around tax reform is more damaging to large corporations than the eventual tax legislation, whatever it brings.

I’m the President and Chief Operating Officer at Modernizing Medicine, a health IT company that empowers physicians with suites of mobile, specialty-specific solutions that transform how healthcare information is created, consumed and utilized to increase practice efficiency...